Unifin’s successful Ps3.14 billion ($206
million) IPO in May confirmed
Mexico’s status as the region’s
strongest primary equity issuance market. However, with Par
Corretora da Seguros’ IPO slated for early June,
Brazil is showing signs of reawakening the interest of
international investors – bankers are confident of a
small flurry of deals from the region’s largest
market in the second half of the year.

The flow picture is improving at the margin, there is
greater FX stability and activity is coming
back

Mariano Espada,
UBS

One of them, Caixa Seguros, is understood to have mandated
its banking syndicate and is hoping to raise
much-needed capital for the publicly owned bank in the
second half of the year.

A banker on the Unifin deal says that despite its small size
– which is a negative for international investors who
prize transaction liquidity – the deal drew plenty of
demand from international portfolio managers. It was roughly
50% allocated to international accounts, which were drawn to
the deal for its pure Mexican play and the fact the company
offers exposure to the difficult-to-find SME-segment.

Driving growth

"Unifin offers very strong growth in a niche leasing space
within finance in which investors haven’t been
able to [previously] participate. The company’s
growth is very attractive – it has been growing by a
compound annual growth rate of between 30% and 40% on both the
revenues and the income side in the past five years –
and so that, plus lack of competing product drove the deal,"
says the banker.

Unifin priced at Ps28 – mid way in its range of
Ps25 to Ps30; the deal was strongly oversubscribed. That
didn’t prevent some sniping. "A small deal like
Unifin shouldn’t have opened the market –
it should have followed a big deal, such as Gicsa [currently in
the market] and not the other way around," says one banker away
from the transaction.

Mexico’s stronger economic outlook is
attracting equity flows into the region, which is boosting the
prospect of success for other deals.

Some ECM bankers in the region say investors are complaining
about valuations in the market, which is a sign of its
popularity. Currently, Mexican real estate companies Gicsa,
Fhipos (a commercial Reit) and Javer are marketing
transactions.

Investors are watching the Gicsa deal carefully, as it will
reopen the Mexican market for large-cap deals, but the
Brazilian Par Corretora transaction is being more keenly
followed as a successful execution would reopen the IPO market,
which has been inactive since
animal health company Ourofino’s R$418 million
(then $172 million) offering in October 2014 – a year
that saw
only two ECM deals altogether. More recently,
Telefonica’s $4.9 billion-equivalent follow-on was
a positive development, but with few orders coming from new
accounts the deal generated less certainty about the
market’s revival than the headlines suggested.

Mariano Espada, managing director and head of
UBS’s Latin America equity capital markets group,
says market sentiment is slowly but safely improving across the
region: "In the first quarter the demand for Latin American ECM
simply wasn’t there on the back of unprecedented
regional outflows and volatile markets. However, the flow
picture is improving at the margin, there is greater FX
stability and activity is coming back. We feel the second half
of the year will be far more constructive."

Espada also says valuations in Brazil, combined with
progress on economic policy direction, make this market a very
interesting proposition: "There are now very few investors who
are overweight Brazil; progress in fiscal reform policies could
be a strong catalyst towards a more constructive view/appetite
towards the country – with large-cap issuance the way
to potentially express that improvement in appetite for
Brazilian assets."

Brazil’s Par transaction reportedly launched
close to being covered after a large anchor order from Gavea
Investimentos, worth R$140 million of the total R$507 million
(valued at the mid-point of its range of R$11.25 to
R$11.60).

JPMorgan also used a large anchor order (from General
Atlantic) in Brazil’s last IPO – for
Ourofino – as part of its pricing strategy. One
competitor critiques the use of large anchor orders, saying:
"You only anchor a deal that you perceive has a high risk of
not getting done – there is no other reason. So when
you have a very high quality transaction that you know will
have an appealing valuation – and you know you are
selling what investors want – then I think
it’s better to signal that confidence through the
more open allocation strategy of a US-style structure. That
also enables a tighter roadshow – you get in and out
of the market with less exposure to market volatility."

Blue-chip appeal

As with Unifin, large blue-chip international accounts are
understood to have placed orders for the Par Corretora
transaction, despite the small issuance size. The sector,
finance, is an appealing one for international investors
despite the macroeconomic challenges and the
performance of BB Seguridade – the largest IPO in
the world in 2013 – also helps build interest. This
has also led to Caixa Economica Federal advancing its plans to
make an IPO for its insurance arm, Caixa Seguros, in the second
half of the year in what will be a key test for market appetite
for Brazil.

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